Thursday, April 29, 2010

German unemployment decreased by a non-seasonally adjusted 162,000 in April. Officially, 3.406 million Germans are currently unemployed. In seasonally-adjusted terms, unemployment dropped by 68,000, pushing the seasonally-adjusted unemployment rate to 7.8%, from 8.0% in March. This is the lowest unemployment rate since December 2008 and illustrates the strong Spring revival of the German labour market.

Statistical changes and active labour market policies, including the famous short-work schemes, made the labour market the bright spot of the recession. Moreover, the formerly very rigid German labour market has slowly but surely become more flexible. Even without official short-work schemes, social partners in most sectors can agree on a temporary reduction of the regular working week. The downside of this flexibility of course is that disposable incomes declined which explains why private consumption has not kept pace with the labour market.

Looking ahead, leading indicators, historical evidence and recent wage settlements with job guarantees all point to a further stabilisation of the labour market in the coming months. The positive trend should also be supported by the latest decision from the German government to extend short-work schemes once again until March 2012. However, as a continued stabilisation of the labour market should initially be marked by a pure unwinding of short-work schemes and increasing working hours, employment growth will be sluggish. Still, even if it is only a small boost, the labour market could end the private consumption recession of late-2009.

At least for the time being, the German good-news-show of the last weeks continues. The harsh winter, the Greek crisis, they have all left the German labour market unperturbed.

Friday, April 23, 2010

Up again. The German Ifo index surged again in April as current conditions improved significantly. The headline index increased to 101.6, from 98.2, and is now at its highest level since May 2008. The current assessment jumped to 99.3, from 94.5. At the same time, the expectations component continued its impressive upward trend of recent months, increasing to 104.0, from 102.0.

Today’s Ifo index adds further evidence that the pause of the German recovery around the turn of the year was nothing more than a temporary break. In terms of economic growth, the first quarter will have been another disappointment. Still, some moderate growth should not be excluded, yet. It only needs a marginal pick-up in industrial production and net exports in March to turn first quarter growth from slightly negative into positive territory.

Looking ahead, the underlying trend of the German recovery remains healthy: business confidence is high, order books are filling, recruitment plans are increasing and even investment prospects are improving. New car registrations in March were one illustration of the recovery gaining traction. The sharpest increase in three years was mainly driven by business vehicles, indicating that companies have started to invest into their truck and vehicle fleets.

All in all, market headlines of recent weeks had the potential for a severe depression. The Greek fiscal crisis, possible contagion of other Eurozone countries and the volcanic ashes: They all seem to threaten the recovery. However, German businesses seem to be untouched by these downbeat scenarios as most confidence indicators have returned to their pre-crisis levels. Maybe German businesses are too down-to-earth, just looking at their filling order books and ignoring dark clouds of fiscal consolidation. Nevertheless, if the real economy now follows up on confidence indicators’ promises, the near future looks very bright.

Friday, April 9, 2010

Of course, there was no news on interest rates. The ECB decided to keep interest rates unchanged at today’s meeting. The more interesting part of the ECB meeting was on the collateral framework and the ECB’s communication on Greece.

The ECB’s assessment of the economy and the inflation outlook remained virtually unchanged. Recent indicators have confirmed the ongoing, though shaky, recovery. The ECB still expects the Eurozone economy to grow at a moderate pace in 2010. The only very slight change in the ECB’s assessment came on inflation. Price developments are now expected to remain “moderate” in stead of “subdued” at the last meeting. Despite this little stylistic change, it does not take away the fact that deflation rather than inflation will remain the biggest concern of the ECB in months ahead.

As expected, the ECB announced some changes to its collateral framework. The current crisis threshold for marketable and non-marketable assets at investment-grade level will be continued beyond the end of 2010, except for asset-backed securities. In addition, the ECB will introduce a new graded haircut scheme in January 2011 and will no longer accept debt instruments denominated in other currencies. Haircuts will be gradually increasing and at least 5%. This new system will only be applied to assets rates in the BBB+ to BBB- range and it will replace the current haircut of 5%. More details will only be revealed in July. However, sovereign bonds will apparently not fall under this new haircut scheme. For government bonds falling under the A- threshold, the old 5% haircut would continue. After all the excitement, the actual changes to the collateral framework seem to be less bold than they could have been. Whether this is a missed chance, remains to be seen.

Most time of the press conference was dedicated to Greece. Prior to the Eurozone’s decision on Greece on 25 March, the ECB had been opposing an IMF involvement, sometimes even very outspokenly. Today, Trichet had a few weak moments and did not really succeed in convincingly explaining the ECB’s u-turn. The ECB’s official position now is that it welcomes the statement on Greece. According to Trichet, Eurozone governments had to take up their responsibility and so they did. The presented joint safety net together with the IMF was a workable statement. Interestingly, there still seems to be some differences of opinion regarding the interest rates at which eventual Eurozone loans should be given to the Greek government. Differences of opinion at least with the German government. Trichet agreed with the principle that loans should be given without subsidies and considered market rates at least the interest rates with which other Eurozone countries can get funding in the market. It is doubtful whether Ms. Merkel has the same understanding of market rates.

The ECB’s walk on Greek eggshells has definitely been nothing to write home about. Crystal-clear communication looks different. However, Trichet did everything not to add fuel to the fire. He even remarked that a Greek default “was not an issue”. Anyway, once the dust has settled, the real substantial issues should emerge again. As regards Greece, it will be the Eurozone governments which have to decide and not the ECB.

All in all, denial or not, Greece is keeping the ECB in wait-and-see mode at least until the end of the year. Fiscal tightening and structural adjustment will make deflation not inflation the major worry of the year.

German exports increased by 5.1% MoM in February, almost offsetting the sharp 6.5% drop in January. At the same time, imports only increased by 0.2% MoM, from 5.6% in January. As a consequence, the trade surplus widened to 12.1 billion euro, from 8.7 billion euro in January.

Today’s sharp increase in German exports was not, yet, enough to turn net exports into a growth driver in the first quarter but it clearly shows that the export-led recovery is still in tact.

Now that all monthly data for February has been published, it is time for a brief intermediate assessment of the German economy. Indeed, the month February had something for everyone; for the advocates of a German double-dip as well as for the camp of an ongoing recovery. With disappointing industrial production, stagnating new orders and weak private consumption, first quarter growth looked set to be flat, at best. Today’s exports open the door for upcoming surprises.

Nevertheless, it would be foolish to now advocate the end of the German recovery. First of all, the jury on the first quarter is still out. While February numbers have been strongly influenced by adverse weather conditions, it only needs a little positive surprise in March to return the German economy to a positive growth path. Secondly, the largest part of the government’s public investment programs still has to reach the economy. And finally, most leading indicators point Northwards. Order books are filling, business expectations are approaching historical highs and employment has grown actually grown in the first quarter. Positive growth surprises are still in the pipeline. Under the surface of the February snow blanket, something good is brewing.

Thursday, April 8, 2010

German industrial production remained on hold in February. What’s more disappointing is the downward revision of the January number to a meagre growth of 0.1% MoM, from initially 0.6% MoM. While the production of capital goods increased by 1.5% MoM, the production of consumer goods dropped by 2.3% MoM. At the same time, the construction sector was not, yet, able to shrug off the impact from the harsh winter, only increasing by 1%, from a 14.2% decline in February.

Today’s disappointing industrial production numbers have increased the likelihood of another weak quarter after the economy’s standstill in the fourth quarter.

Looking ahead, unless March has some real good surprises in the offing, strong growth will only return in the second quarter. However, there is hardly any reason to become pessimistic again. All ingredients for a catching up of the economy are there. The largest part of the government’s public investment programs still has to reach the economy. Moreover, order books are filling, business expectations are approaching historical highs and employment has grown actually grown in the first quarter. The first quarter weakness was temporary, not structural. It simply takes a while before the economy gets rid of the snow blanket.